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Heads in the sand

Although there is no easy solution to the ongoing financial crisis, the Chancellor and his cohorts have so far been all spin and no action. During a recent BBC interview, Gordon Brown responded to questioning by glossing over the issues and replying that the slump in the UK housing market is “containable” and the country is better placed to cope than in previous slowdowns.

Head, bury and sand are three words that come to mind, and although the Government has admitted there is a problem, the actions they have taken thus far to address the crisis have been futile.

For starters, since September 2007, the Federal Reserve has cut US interest rates by 3 per cent and the UK base rate has been cut by just 0.75 per cent. When is the Bank of England going to wake up to the fact that random quarter-point reductions are simply not enough?

The spread between Libor and BBR shows no sign of recovery, and while this persists, the chances of the mortgage market moving towards normality are remote. The Bank of England needs to recognise the seriousness of the situation, and bring BBR down to at least 4 per cent in the next couple of months.

Up until now, Mervyn King’s overcautious attitude and his fears of rising inflation have prevented him from making anything other than minimal reductions but do worries over the rising cost of a pint of milk really warrant the failure to utilise this mechanism? With the IMF predicting slower UK economic growth, high inflation is likely to be less of a concern so how long can this realistically be used as an excuse for inaction?

Considering that interest rates have not been used to address the crisis, you would expect the Government to step in with an alternative strategy but as yet this has not been the case. While the injection of £15bn into the money markets gave many in the industry hope, the offer was significantly over-subscribed and the additional offers provided in the US have not been seen over here.

Another questionable initiative concerns Darling’s taskforce. Designed to help reopen the mortgage-backed securities market, the fact that the group will not present the final report until autumn 2008 is blatantly too little too late.

Although currently centred on the mortgage market, it is only a matter of time before the crisis spreads to all corners of the UK economy. Consumers are already finding it hard to secure home finance and mortgage costs are increasing. March house prices experienced their biggest monthly fall since the 1990s crash and all of this transpires into decreased disposable income and a general feeling of diminished personal wealth. Human nature will lead consumers to tighten their belts and consumption will suffer. This could damage industry and potentially lead to increased unemployment.

The Government’s ineffectual action has not gone unnoticed. In an open letter to the Chancellor, mortgage packager KGB’s chief executive Rachel Bancroft called for action to safeguard the mortgage industry and Andy Pratt, CEO of Alex ander Hall, has called for Mervyn King to show solid support for the economy and pump more funds into the market.

Add to this the Treasury committee’s concern that the risk posed by the liquidity crisis may have been underestimated and it is obvious that the demand for intervention is increasing. For the sake of the UK economy, let us hope that these pleas for drastic action are heard.

Iwas chatting to a good friend of mine who happens to be a long-standing IFA. Over the last 20 years or so, he has built up a business looking after the finances of many high-earning professionals and entrepreneurs.

Accounting rules are worsening the liquidity crisis, says Home Funding chief executive Tony WardThe credit crunch has had everyone looking for a fall guy. In the UK, politicians and bankers have been particularly quick to point the finger abroad in an attempt to distance themselves from any imminent economic ill.

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22nd February 201911:47 am

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